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What happens next, as the end nears for the Government’s COVID lending schemes?

18-02-2021|Ultimate Finance

Whilst the UK’s vaccination programme cracks on at an impressive pace, lockdown restrictions remain in place and parts of the economy are very much still in suspended animation. GDP figures published last week confirmed 2020 as having the deepest fall in economic output since 1709. The rebound that will follow the removal of restrictions needs to be looked at in the context of ‘the harder you fall, the higher you bounce’.

The Government have so far committed £280bn of support to businesses and households, with a war-time approach to fiscal intervention. Economic policy has expanded in many different directions, from employment support schemes (furlough) through to grants, Government-backed loan schemes, deferred or reduced tax liabilities and credit moratoria. A substantial overall package but entirely in keeping with the significant hit to the economy. Nonetheless, this state support has been extremely powerful in supporting a large number of businesses and households – without it the level of unemployment and business failures would have been substantially higher.

As all eyes turn to the Budget announcement on 3rd March, many politicians and trade groups are calling for more. Tony Danker, director-general of the CBI, believes “The rule of thumb must be that business support remains in parallel to restrictions and that those measures do not come to a sudden stop, but tail off over time. Just as the lifting of restrictions will be gradual, so must changes to the government’s sterling support to businesses.”

Governments around the world have been using the record-low cost of Government debt issuance as a justification to keep going. There is no newly discovered magic money tree and bond markets can of course turn quickly – as Greece found out ten years ago – but, for now, cheap borrowing costs underpin a relaxed attitude to public borrowing. Policy remains rightly focused on the risks of not doing enough to first bridge through lockdown restrictions and then to support the recovery thereafter.

It therefore feels like an opportune moment to review the effectiveness of one of the Government’s flagship support measures – the guarantee-loan schemes – and consider what might come next.

Over £70bn of funding has been delivered through these schemes – c. £45bn of bounce back loans, c. £21bn CBILS and c. £5bn CLBILS. In total, over 1.5m loans have paid out under these schemes, which have been highly effective in ensuring liquidity is available to businesses in a period where the uncertainty over trading and affordability would otherwise have significantly reduced appetite from lenders. As an accredited lender ourselves under CBILS, we’ve worked closely with the British Business Bank to provide a range of term loans, Asset Finance and Bridging Finance facilities to our clients to assist with revenue falls, liquidity pressures and investment needs.

Bounce back loans make up around two thirds of guaranteed lending by value but over 90% by facility numbers. Designed to facilitate immediate distribution with minimal checks, they have been extremely valuable to borrowers in more distressed industries but there is a significant fraud risk associated with the operation of the scheme. Expectations on default levels start at 15% and go much higher. Until repayments begin later this year, there will be limited insight into how these borrowers are faring and, even then, there’s now the option of extending the repayment period out to 10 years.

The current deadline for applications under these schemes is at the end of March – albeit another extension is possible – and it’s critical that SMEs have access to finance beyond facilities that require shared risk from the taxpayer. The £35.5bn in net borrowings by businesses was £25bn higher than average levels over the previous five years, and in stark contrast to the experiences of previous recessions. The ability to access finance of this magnitude is testament to the improved resilience of the banking sector since 2008 but likely masks the underlying appetite of the UK’s main lenders without Government support. Indeed, research has shown that the outstanding value of non-emergency lending by banks to SMEs dropped by 10% last year.

The Government cannot support commercial lending in perpetuity and the key is the eventual transition away from these schemes. Whereas a sizeable proportion of these loans have been used to aid survival, or to provide a cash buffer, the non-bank lending sector will play a critical role in supporting SMEs with growth funding and refinancing when there is no further Government support.

There have been many unintended consequences from CBILS and bounce back loans – product distortions and competitive imbalances – and the lending market has undoubtedly been cannibalised by the abundance of unsecured cashflow / term loans. But the policy objective of supporting businesses has very much been met, even if the hangover from 2020/21 will be significantly higher levels of corporate debt in many sectors for many years to come.

The British Business Bank have done a brilliant job in difficult circumstances to expand the scheme to the level it is today, and we’re encouraged by some of the plans for the successor scheme in facilitating liquidity without undue market distortion from the Government covering 12 months of interest payments.

Announcements over the next two weeks will be critical for detailing the likely path to recovery for businesses and for households. Starting with the Prime Minister’s ‘roadmap’ next week and culminating in the Chancellor’s Budget announcement the following week, politics, health and economics will inevitably collide. Yet staffing and investment decisions from businesses will play a key role in determining the pace and extent of the recovery, and giving firms the confidence to hire and invest has to be a priority.

To do this requires both preventing viable businesses from failing and ensuring that they are in a financial position to grow again when restrictions are eased and uncertainty lifts. The economic shock from the COVID-19 crisis has been substantial as has the policy response. Having protected jobs and businesses for so long, it would be illogic for the Government to give up now and support must remain for as long as restrictions on trading persist, particularly in industries that rely on social interaction.

The protective bubble from Government support saw company insolvencies at a 31 year low in 2020. This is the impact of the loan schemes and the Government taking so many costs (tax and payroll in particular) onto their books, either temporarily or permanently. The cash cost of reopening or ramping up trading again will be significant and access to financing is going to be key. Releasing working capital from unpaid invoices will be one way in which alternative forms of funding will prove invaluable in the months ahead.

The Institute for Public Policy Research have neatly summed up what is riding on the next two weeks – “Millions of people’s jobs and livelihoods depend on the Chancellor stopping firms going broke just as the pandemic is coming under control, and ensuring that they have enough cash not just to limp through this crisis but to come roaring out of it when lockdown ends.”

Liquidity remains vital for businesses yet the Government cannot support commercial lending in perpetuity. Whilst there is a strong case for a short-term extension of the lending schemes, as well as other support measures, the key is the eventual transition away from these schemes. Whereas a sizeable proportion of Government-backed loans have been used to aid survival, or to provide a cash buffer, beyond this the non-bank lending sector will play a critical role in supporting SMEs with growth funding and refinancing. At Ultimate Finance we provided over £125m of new funding to SMEs in 2020, with CBILS only making up a small proportion of this, and we have a strong appetite to play our role in using our funding solutions to support the economic recovery.

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